Sep
16
Sum of Parts in Hole
Filed Under B2B, Blog, Cengage, eBook, Education, eLearning, Financial services, Industry Analysis, internet, Publishing, STM, Thomson, Workflow | 3 Comments
So, having noted the Jana/Teachers activist shareholders story on McGraw-Hill recently here, no one is more surprized than me at seeing it come instantly true. I am left wondering just how that happened. So Terry McGraw gets a letter from Jana saying “You would be better off in two parts”, and doesn’t say “Who the hell are you?” but responds “Smart idea boys, we’ll do it next week!” The only explanation is that this loaf was already half-cooked, and the Jana intervention gave Chairman McGraw opportunity to do what he wanted to do anyway, and follow Thomson, Reed, Wolters Kluwer and others in the one respect that they all have in common: they all sold out of education. Of course, this is blue-blood McGraw-Hill, so you don’t sell out, you just cast it adrift, while climbing adroitly into an accompanying life boat.
As a result we have two vessels now heading in opposite directions. McGraw Markets (everything which is not education), including all the B2B and credit rating assets, is in one, and everything education is in the other. But Pat English, a shareholder and CEO of Fiduciary Management Inc, told Reuters that this was only the start: “It doesn’t make sense to have S&P ratings, S&P indices, Capital IQ, Platts, and other companies under one roof”. So what happens in October? Do we see Chairman McGraw skip down the gangplank and set sail in the SS S&P, leaving the waste barge B2B to sink in the Hudson? Anything is possible of course: we are watching one of the largest corporate deconstructions in the sector since D&B sold all of their global subsidiaries to franchise holders.
And why? The answer is a not inconsequential $3 billion. This is the difference between the valuations expected for Markets and Education apart, compared to the current, or pre-announcement, values. Education is seen to be in the slow lane and holding back an advanced valuation of S&P. No one has ever explained cogently to me why companies, however large, cannot have valuations which reflect the intrinsic worth of their parts, and why “true” valuations cannot be exhibited without break out, but clearly I am in the nursery class in these matters. And my eye also caught the Chairman’s statement that $1 billion in overheads would be saved. That I really appreciate. I can see that the corporate office of a chairman, for example, would need less aides, fewer executive jets and less travel in a global $4.5 billion company than in a $6.5 billion global company, but since Chairman Terry is going to Markets, there will have to be another Chairman at Education, also aided and abetted and privately flying around a $2 billion company. So where does the saving come in?
And where does the future come in? The US education market is grossly over-published. Margins are too low to attract investment (hence this deal). The nation hovers on the brink of radical IT solutions to address a national standards deficit, present across the developed world, which can only be tackled through individualized digital learning: everything else has failed. McGraw Education have a decent record of innovation, good assessment assets like the California Bureau, and 20 years of struggle, from Primis onwards, to show in justification. But they sit on the edge of the same decreasingly relevant mountain of textbook assets that also contains Harcourt Houghton Mifflin. They have a junior position in non-US markets, compared with their major competitor. But no one can currently compete with Pearson. Cengage have learnt to go global and diversify. McGraw could go with Harcourt, but the resulting debt pile would be bigger than the Greek economy, so this is unlikely. Maybe the “we now have the message” boys at IBM, or Intel, or Cisco, will buy them. But why? There are some good assets in medical education (Harrisons) but are we looking here at a slow death from asset sales until only the unsaleable are left? Eventually Pearsons’ major competitor in global markets will be a borne digital platform company, but these assets will not help them substantively to reach that position. On the other hand, my telescope, scanning the horizon desperately for a rescue vessel, sees the sleek global liner HP, just refuelling on high octane Autonomy. Vast interests in education there, and the potential to be the platform player to fight Pearson?
Back at Markets there are problems of a different kind. Platts, aviation and construction all have heavy data capable of real impact in workflow orientated networking. Although serious attempts have been made to leverage this, there is no evidence of much stomach for the fight, some critical people left, and the failing magazine/advertising/subscription businesses are, well, still failing. Pity that the “very best thinking” of the management team, which the Chairman quoted as the reason for the split, was not applied here some years ago. Alongside these are really good, but unrelated, businesses like JD Powers. And then this high grade financial services stuff, with high growth Capital IQ and of course the S&P play most valuable of all. I am forced to repeat the question of Mr English in other words: unless these businesses are radically changed in strategic direction, this company looks as much like a portfolio conglomerate as ever its now deceased parent did. Will this management make those changes? Or will they sell the most marginal assets next year and use the cash to buy back more shares? And is this portfolio nature a real poison pill against a purchase by another mega corp? So eventual break-up is eventually inevitable?
More questions than answers, but as we all search for value on the ocean bed of this recession, there can be no doubt that this will become a common path for beleaguered corporates in years to come. Until, in fact markets recover and growth seriously returns.
Aug
26
BNA and Bloomberg herald a new order
Filed Under B2B, Blog, Financial services, Industry Analysis, internet, news media, Publishing, Reed Elsevier, Thomson, Uncategorized, Workflow | 4 Comments
Sometimes it takes a really big event to remind us of underlying changes that we should have recognized more prominently at the time. With BNA, The Bureau of National Affairs Inc, in Washington DC (and seldom is a location so important as this one) being acquired by Bloomberg a real shift is recognized. It is not solely or only the case that Bloomberg want to move closer to law practises in the US and around the world, or that many of those practises might at some future point become Bloomberg terminal users rather than Thomson Reuters WestlawNext users. It is that law and regulation pervades every branch of business, from finance outwards, and that the idea that paralegal or quasi-legal had fundamentally different needs from “qualified ” legal are gone. My colleague at Outsell, David Curle, has been particularly good at pointing out this democratization of the law and the wide and free availability of primary legal content. BNA built a very successful company around the idea that lawyers and others should have a closer view of how law was being created in Congress, and how embryonic law might affect the interests of their clients and their companies.
First, the details. Bloomberg have apparently offered $990m for BNA, which is around 2.25 X the current stock price, 3 X current revenues of $331 m and about 13 X EBITDA. This is a very good price at this time, though a pre-recession valuation might have been a shade higher. BNA was an employee-owned company with an eighty year history of democratic process (to attend an AGM, with its board election involving some 1500 shareholders, was always an impressive demonstration of this). Its founders, New Deal lawyers, all shared a principled view of the importance of participation and the sharing of information. Now it joins another (intensely) private company, younger by 50 years but also founded on the idea that content should and could be shared more effectively.
So what does all of this do to the balance of power? For Thomson Reuters, comparatively little, given that it has moved decisively (through its GRC developments) into that wider view of legal and regulatory relevance stated above. BNA’s two great assets would be its brand, forever associated with the reporting of embryonic law in committee in DC, but actually much wider in content and significance, and its tax services, a market leader in conjunction with CCH (Wolters Kluwer) and Thomson Reuters Tax (RIA). It is notable that Thomson, Reed Elsevier (Lexis), and CCH all license content from BNA for access online. This will presumably end after current contracts expire. Thomson will be hurt least by this. But note how important contextualised news is now to everyone: BNA gives this to Bloomberg in a way which helps to neutralize the Reuters/West advantage.
But both Lexis and CCH will suffer collateral damage. The loss of the tax content will cause real hurt to both, and the wider impact of the loss of the BNA brand and full content set will be hard for Lexis in particular. BNA content was important in that context in particular, since previous attempts to absorb and use highly branded legal content (Matthew Bender) seem to have petered out in terms of user recognition. Given that private equity was unable to enter the contest at these valuations, Lexis would have been the obvious candidate as a counter bidder, and the fact that it felt unable to match a high but not astronomic bid points to possible future environments. It may be that Reed Elsevier see their future with Lexis in risk management rather than in legal as such, and if that were the case then we could well, in the next five years, see a new order of things, with Thomson Reuters and Bloomberg dominating legal and regulatory marketplaces, and CCH and Lexis forming a sort of second division in positions increasingly hard to maintain outside of specialist niches. There is only one shoe left to drop in US legal marketplaces. Analysts will now look closely at whether ALM (owned by Apax) will be the last major play.
Bloomberg appear to be indicating that they will hold BNA as a separate wholly-owned subsidiary in the first instance. This makes sense: they have distinctive cultures and need time to get to know each other. It is however interesting to think where the optimum first linkages will take place. Certainly management in the nascent Bloomberg Government unit will be salivating: they will rightly see the congressional law reporting as a key element in bringing more widespread usage in government at all levels. And everyone involved in the business of proliferating Bloomberg terminals more widely in the tax advisory marketplace will be exultant, since this is a real game changer for them. If the claim that we are all moving to workflow is correct, then BNA is vital to Bloomberg in its wish to move into adjoining, content – related markets like legal and paralegal.
And a final and personal note on culture. As an advisory director to BNA’s international marketing (Bloomberg will transform that with their global coverage) I have, for almost 25 years, worked with quite the most civilized publisher on the Planet. The values of the founders were exemplified by their successors, and while employee ownership sometimes caused problems of its own, those who worked there were embued well beyond the normal with a sense of purpose, and indeed, a lifetime commitment, to what they were doing, and a belief that their purpose was part of the public good. This cannot be bottled, so Bloomberg must be careful to preserve it. Having tried to enter security law in the early years of this century, and made very slow progress, they should know how difficult it is to get very high level editorial intervention and commentary to work properly. The biggest property they have so far bought is BusinessWeek, which was not strictly comparable. BNA is different, and to get the real value they will need to treat it very differently.
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